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Economy

Fears record 2014 surplus ''recession-type''

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Port of Busan, South Korea: The competitiveness of the country's exports is weakening due to the strong won and weak yen.   © Reuters

SEOUL -- South Korea posted a record high current account surplus last year for the third year in a row as weak domestic demand reduced imports.

     According to preliminary data released by the Bank of Korea on Monday, South Korea recorded an $89.4 billion surplus in its current account in 2014, up 10.2% from the previous year.

     Some analysts say South Korea's surplus is expanding as its economy slows and it imports less.  

     South Korea's trade balance increased 12.2% to $92.8 billion, with exports increasing 0.5% while imports fell 1.3%. The increased trade surplus helped South Korea boost its current account surplus by more than offsetting an expanded deficit in the balance of services which records travel payments and patent revenues.

     A central bank official denied claims the current account surplus should be defined as a ''recession-type,'' saying the reduction in imports was partly due to falling crude oil prices.

     But Heo Jae-hwan, a researcher at KDB Daewoo Securities, said he is "more than 99%" sure that the surplus is a ''recession-type'' because companies are building up retained earnings, rather than using foreign currencies earned for investment and consumption.

     South Korea topped Japan in terms of current account surplus for the first time in 2013. The difference in surplus between the two countries that year was $47.5 billion and it is believed to have grown bigger in 2014.

     In January 2014, the BOK forecast the country's current account surplus to reach about $55 billion in the year. It actually turned out to be about 60% larger than forecast.

Currency intervention?

Consumer spending continues to be weak in South Korea, while production and capital investment in the corporate sector are hardly brisk. Amid slowing domestic demand, exports, which lead the South Korean economy, face challenges. 

     The export price index, compiled by the BOK on a contract currency basis, came to 97.3 points in 2014 against the base figure of 100 for 2010, down 1.9 points from 2013 and the lowest since 2009.

     The index rises when the won strengthens against the dollar. Since 2013, however, the South Korean index and currency have been moving in reverse. That means South Korean companies have been trying to maintain their export market shares by holding prices down at a time when Japanese companies are reinforcing their international competitiveness on the back of a weaker yen.

     President Park Geun-hye started warning last autumn about the adverse effects of the weak yen on South Korea's economy, prompting speculation that the government will intervene in the currency market and make additional interest rate cuts. The appreciation of the won against the dollar therefore is slowing.

     Takayuki Miyajima, an economist at Japan's Mizuho Research Institute, said "export environments for South Korean companies will somewhat improve in 2015."

     But economic activity in Europe and China, major export markets for South Korea, remains dull. Given South Korean automakers' heavy reliance on Europe, China and the Middle East for exports, corporate earnings in the country are unlikely to pick up for now, Miyajima said.

 

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